Mexican Peso appreciates as US inflation data justifies Fed rate cuts
|- Mexican Peso strengthens against US Dollar as core PCE inflation falls below expectations, boosting prospects for Fed rate cuts.
- Ongoing political uncertainties in Mexico dampen Peso’s demand.
- Banxico cuts GDP forecasts for 2024 and 2025, indicating slower growth and potential rate cuts.
The Mexican Peso recovered some ground on Friday against the Greenback after the Federal Reserve’s (Fed) preferred inflation gauge, the core Personal Consumption Price Expenditures Price Index (PCE), was a tenth lower than expected, suggesting that the disinflation process has evolved. This gives the Fed the green light to begin cutting rates, which is a headwind for the US Dollar. At the time of writing, the USD/MXN trades at 19.64, down 1.01%.
Mexico’s economic docket was absent during the week. However, political uncertainty linked to the judiciary reform and the dissolution of autonomous bodies in bills pushed by President Andres Manuel Lopez Obrador might keep investors nervous as the new Mexican Congress takes office.
Aside from this, the Bank of Mexico (Banxico) is downwardly reviewing economic growth as it estimates the Gross Domestic Product (GDP) for 2024 to drop from 2.4% to 1.5% and from 1.5% to 1.2% for 2025 after revealing its Q2 2024 quarterly revision.
Banxico Governor Victoria Rodriguez Ceja warned that adjustments to the primary reference rates would be gradual only when macroeconomic conditions allowed them.
Regarding this, most banks expect Banxico to reduce rates by at least 50 basis points (bps) for the remainder of 2024. This would pressure the Mexican currency, which has already depreciated 15.38% in year-to-date (YTD) figures.
Across the border, the US Bureau of Economic Analysis revealed that the disinflation process continues. The Fed’s favorite inflation gauge, the core PCE, dipped on an annual basis, while the headline figures remained unchanged.
In the meantime, the University of Michigan (UoM) Consumer Sentiment survey in August improved for the first time in five months and exceeded the preliminary reading announced two weeks ago.
The UoM poll revealed that inflation expectations for one-year dipped, while for a five-year period they remained unchanged.
Daily digest market movers: Mexican Peso counterattacks, shrugging off political uncertainty
- Mexican President Andres Manuel Lopez Obrador's decision to pause relations with the US and Canadian ambassadors this week will continue to weigh on the Mexican Peso.
- US core PCE reading for July showed that prices rose by 2.6%, unchanged from the previous month but less than the 2.7% YoY estimates. The headline PCE stood at 2.5% YoY, beneath forecasts of a 2.6% rise.
- Same report reveals that consumer spending rose while income growth was sluggish, raising doubts that Americans would keep the pace.
- According to the UoM, US Consumer Sentiment in August rose from 66.4 in July to 67.9. Inflation expectations for one year dipped from 2.9% to 2.8%, and for a medium-term — five years — stood at 3%.
- Data from the Chicago Board of Trade (CBOT) suggests the Fed will cut at least 97 basis points (bps), according to the fed funds rate futures contract for December 2024.
Technical outlook: Mexican Peso climbs as USD/MXN drops below 19.70
The USD/MXN uptrend remains intact, although the exotic pair dived toward the 19.65 figure as traders grow confident the Fed will begin its easing cycle, reducing the interest rate differential between the US and Mexico.
The Relative Strength Index (RSI) is mixed, in bullish territory but aiming lower, showing that sellers have the upper hand in the near term.
On further USD/MXN weakness, the first support would be 19.50. A breach of the latter will expose the August 23 swing low of 19.02 before giving way for sellers eyeing a test of the 50-day Simple Moving Average (SMA) at 18.59.
However, if the pair remains above 19.50, a challenge of the 20.00 figure is on the cards. Once that level is surpassed, the next stop would be the year-to-date (YTD) high at 20.22, followed by the September 28, 2022, daily high at 20.57. If those two levels are surrendered, the next stop would be the August 2, 2022, swing high at 20.82, ahead of 21.00.
Mexican Peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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